Dark days for the black stuff?

It has never happened before, and it may never happen again. The merger of a spirits business with a brewer to create one marketing organisation has previously seemed as unlikely as sticking household cleaners together with financial services.

Yet Diageo has announced it is to smash its two core marketing divisions – the UDV spirits arm and Guinness brewing – into one.

The company’s incoming chief executive, Paul Walsh, claims that the drinks business has changed beyond recognition in recent times. In the days of old, men drank beer or stout. But in these unisex and multibrand times, men and women may choose Guinness, Bacardi Breezer, Hooper’s Hooch or vodka and Red Bull. Marketers call this a switch from ‘session’ drinking (downing lots of pints) to “repertoire” drinking (supping the beverage that suits your mood at the time).

This change in drinking habits is what Diageo claims is behind the merger of Guinness and UDV.

But others are not convinced – it is more likely a cosmetic exercise to impress investors that the company has a strategy for growth and cost-cutting, they say.

When Diageo was first formed in 1997 from the merger of Guinness and its United Distillers arm with Grand Metropolitan’s International Distillers & Vintners, Burger King and Pillsbury, observers believed the combination was unworkable in the long run.

They saw it as an attempt to forge the world’s largest spirits company – which it did – but in the process taking on some cumbersome food baggage that needed to be ejected.

Sure enough, current Diageo chief executive John McGrath has spent the past few weeks unloading Pillsbury (sold to General Mills for $10.5bn) and Burger King (which is to be floated off). This merger could be a way of milking cost savings until it is Guinness’ turn to be sold.

Analysts have always doubted Diageo’s commitment to Guinness. They believe it merely muddies Diageo’s waters. By merging the Guinness division into UDV, the problem does not go away – if anything, it becomes magnified. The portfolio of seven star spirits brands, including Smirnoff and Johnnie Walker, sitting alongside Guinness means the stout will stick out like the proverbial sore thumb. It is one thing flogging cases of spirits, quite another selling barrels of stout.

It seems in some ways a little unfair on the Guinness marketers. They are likely to lose out to spirits marketers for top jobs in the new division. Guinness has been a brand run by obsessives, and their obsession appears to have paid off. The brand appears to be on course to doubling its market share in ten years, and its recent ad campaigns have gone some way to encouraging the under-30s to try it out.

There are fears that by being subsumed into the spirits division, Guinness may slip down management’s priorities. If Diageo succeeds in buying Seagram’s spirits brands, the portfolio will become even more spirits heavy.

With consolidation in the beer industry well under way, there will be plenty of willing buyers for ‘The black stuff’.


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